The General Assembly Seems Ready to Provide Some Consistency in Mechanic’s Lien Waiver

Christopher G. Hill | Construction Law Musings | March 5, 2018

Back in 2015, the Virginia General Assembly amended the mechanic’s lien statute (Va. Code 43-3) here in Virginia to preclude any contractual provision that diminishes a subcontractor or supplier’s “lien rights in a contract in advance of furnishing any labor, services, or materials.” However, this amendment was only applicable to subcontractors and suppliers. For political and other reasons, general contractors in Virginia were left out of this change. This omission by the legislature put Virginia general contractors in the position of potentially being forced by project owners to waive their mechanic’s lien rights without the ability to run that risk down stream to their subcontractors and suppliers.

A recent bill enrolled during this legislative session, HB823, provides some remedy to this inconsistency. This bill (a .pdf of which can be obtained here) amends Virginia Code 43-3 and Virginia Code 43-21 to effectively preclude full contractual waiver of lien rights by general contractors with one caveat. That caveat is that with the amendment to 43-21 relating to priority of liens the general assembly has specifically authorized pre or post provision of labor or materials subordination of general contractor mechanic’s liens to any deed of trust on the property in question. In short, general contractors got at least partial relief from the contractual bind that the previous legislation put them in.

Of course this begs the question of whether subcontractors and suppliers can be forced to subordinate their lien rights given the above-quoted language. Would doing so constitute diminishing those rights through the loss of priority? In the past few years, I haven’t seen a case that answers this question. As always, I recommend that you review the statutes yourself, preferably with the advice of an experienced Virginia construction attorney.

Michigan Construction Lien Rights Trump Pay When Paid Clause

Scott R. Murphy | Barnes & Thornburg LLP | September 26, 2016

Recently, the Michigan Court of Appeals examined whether a supplier’s construction lien rights were limited by a pay-when-paid clause contained in the supplier’s contract with the general contractor. In Dubock v Copeland Paving, Inc., 216 Westlaw 1230860 (March 29, 2006), owners of a law firm filed a lawsuit against an asphalt supplier based on the alleged shortfall of asphalt used to repave the law firm’s parking lot. The supplier filed a counterclaim to foreclose on its construction lien against the owners as well as a breach of contract claim against the general contractor.

The first issues presented to the court was whether the amount of the supplier’s lien claim, which exceeded the contract price between the supplier and the general contractor, rendered the lien invalid. The owner argued that the claim of lien was overstated and vexatious because the overall contract price between the supplier and general contractor was less than the supplier’s claim of lien. However, because the owner failed to demand sworn statements and receive valid lien waivers, the court rejected the owner’s argument. In reaching its decision, the court held that MCL 570.1107 (7) specifically permits a supplier to include a time price differential in calculating its lien amount so long as that item is part of the supply contract. The time price differential was not considered a late fee and permitted the lien claimant to recover amounts that exceeded their original contract price.

In addition to challenging the lien amount, the owners contended that the supplier had no right or expectation of payment when it filed its because the contract between the supplier and the general contractor indicated that the supplier “would not get paid until Copeland (general contractor) was paid.” Commonly referred to as a pay-when-paid clause, such clauses have been uniformly upheld under Michigan law. In rejecting this argument, the court reasoned:

Despite that such contractor’s supplier understanding inevitably exists, legislature enacted MCL 570.1107(1), which permits suppliers a lien based on the property owner’s possession of the supplier’s materials. The statute does not include the limitations urged by the (owners). Rather, the lien may be filed regardless of whether the contractor promised to pay the supplier at the time of delivery, when the owner pays the contractor, or at some other time. Accordingly, the owner’s claim is without merit.

As set forth above, the court held that the particulars of the supplier contract with the general contractor do not dictate the supplier’s lien rights against the owner.

Finally, the owner also argued that the supplier improperly pursued its lien claim against the owner when it could have obtained a judgment against the general contractor on its breach of contract claim. The court rejected this argument as well, holding that the supplier could elect which claim to pursue and which claim not to pursue. The court determined that the owner failed to appreciate the purpose and intent of Michigan’s Mechanics Lien Act which does not require the court to simultaneously examine and resolve each claim and defense. To hold otherwise, would read words into the statute that do not exist.

To add insult to injury, the owner was also faced with paying attorneys’ fees which far exceeded, and nearly doubled, the amount of the claim of lien. The awarded amount, $63,119.53, was imposed jointly and severally against the owners and their former attorney even though their lien was limited to $32,574.00. In rejecting the owners’ arguments, the court determined that counsel’s block billing was not improper such that it would invalidate the supplier’s claim of lien. The court determined that the supplier was certainly a prevailing party as contemplated by the Act and rejected the owners’ argument that the supplier unnecessarily inflated its attorneys’ fees by pursuing its lien claim against the owners instead of quickly securing summary disposition against the general contractor.

As discussed above, the court determined that the supplier was not legally required to pursue its contractual remedy over its lien remedy. The court’s decision reaffirms Michigan’s strong public policy in favor of enforcing lien rights even when alternative remedies are available.

Your Invaluable Mechanic’s Lien Rights – Exercise Them!

Adam J. Sklar | Cole Schotz PC | May  5, 2016

The right to file a mechanic’s lien is established by state statute, allowing those providing work, services, materials or equipment to a construction project with additional valuable security in the event of non-payment of amounts due under a contract for such work, services, materials or equipment. As a pair of recent unpublished New Jersey Appellate Division decisions illustrate, the proper exercise of those rights can make a significant difference in attempting to obtain payment.

The Construction Lien Law (“CLL”), N.J.S.A. 2A:44A-1, et seq. sets forth the requirements for qualifying for and filing a lien claim against a private commercial or a residential property in New Jersey. The Municipal Mechanics’ Lien Law (“MMLL”), N.J.S.A. 2A:44-125, et seq. sets forth the requirements for qualifying for and filing a lien against the funds of a project contracted by a New Jersey public agency (though not projects contracted by the State of New Jersey). In the two recent cases discussed below, a subcontractor on a public project succeeded in obtaining a remedy after filing a lien under the MMLL, while a subcontractor on a private project deprived itself of a potential remedy by failing to file a lien under the CLL.

In Vincent Pools, Inc. v. APS Contractors, Inc. (Docket Nos. A-2670-13T3, A-2688-13T3, Decided March 18, 2016), a subcontractor, Vincent Pools, Inc. (“VP”), was retained by a general contractor, APS Contractors, Inc. (“APS”), to install the plaster work for two swimming pools that were part of a larger municipal pool complex project that Jersey City had contracted with APS to construct. Upon the completion of VP’s work, a dispute arose over the quality of that work. Jersey City demanded that the pools be re-plastered, while APS offered, instead, to acid wash the pool. Jersey City terminated APS’s contract and claimed that it had paid APS in full for the work completed on the pools prior to the termination, though it admittedly did not pay APS for certain outstanding change order work. APS, in turn, withheld $162,468.92 from VP. VP then filed a municipal mechanics’ lien claiming a lien on the project funds due and owing from Jersey City to APS, and filed suit seeking, among other things, the enforcement of its lien against Jersey City. At trial, a jury rendered a verdict in favor of VP on its lien claim in the amount of $150,498.92, as well as substantially more in favor of ABS in connection with ABS’s contract claims against Jersey City.

On appeal, as it related to the verdict in favor of VP on its lien claim, Jersey City argued that it would be double paying if it paid VP any funds on account of VP’s lien, because it had already paid APS in full from the funds appropriated for the pool project. The Appellate Division recognized that a lien filed under the MMLL is limited to the amount owed by the public agency to the general contractor at the time of the filing of the lien or what thereafter becomes due under the prime contract. A public agency, therefore, cannot be liable for more than the amount of the public contract if it pays the general contractor pursuant to the contract terms and withholds amounts sufficient to cover any liens filed. The court determined that the MMLL refers to the full amount of the public contract as the amount to which a lien may attach, and not just the amount that may be allocated to a specific portion of the contract. Thus, although Jersey City claimed to have paid APS in full for the particular work performed by VP, because Jersey City still owed money to APS on the contract as a whole, plus change orders, VP’s lien attached to those funds. In fact, to ensure Jersey City was not double paying for VP’s work, the trial court reduced APS’s award to offset amounts previously paid to APS for Jersey City’s prior payment on account of VP’s work, which had not yet been paid to VP. The Appellate Division further noted that because the MMLL, and New Jersey’s Bond Act and Trust Fund Act are to be read cumulatively, VP’s ability to recover under any one of those acts does not preclude recovery under any of the others. Thus, the Appellate Division affirmed the verdict in favor of VP on its lien claim.

The unpaid subcontractor in Exterior Walls Systems, LLC v. 3D Contracting of Central Jersey, Inc. (Docket No. A-0383-14T4, Decided February 18, 2016), was not so fortunate. There, Exterior Wall Systems, LLC (“EWS”) subcontracted with 3D Contracting of Central Jersey, Inc. (“3D”) on a private construction project for JSN Deli Corp. (“JSN”). EWS claimed that 3D failed to pay it in full for its work. EWS brought suit against 3D, ultimately obtaining a default judgment against it in the amount of $48,000. As the Appellate Division aptly noted, “[i]mportantly, EWS did not file a lien, pursuant to the provisions of the [CLL] for its work done.” That is critical, because instead of having a lien on JSN’s interest in the real property on which EWS’s work was performed, and perhaps having had JSN withhold payment to 3D to satisfy EWS’s lien, EWS was left with a potentially uncollectable judgment against 3D.

EWS attempted to levy on any and all of 3D’s assets, to the extent there were any, including any amounts claimed due by 3D from JSN under 3D’s contract with JSN. JSN, however, had earlier won a dismissal of a lawsuit 3D had filed against it for amounts allegedly due under that contract, based on the statute of limitations. EWS, thereafter, filed a motion seeking an order compelling JSN to turn over to EWS funds allegedly owed by JSN to 3D, which the trial court denied. EWS appealed, and the Appellate Division determined as a matter of law that, based on the facts before it, there was no “debt” from JSN to 3D that would be subject to EWS’s execution or garnishment under the relevant New Jersey statutes. The Appellate Division, therefore, affirmed the trial court’s denial of EWS’s turnover motion, leaving EWS without a remedy against the owner and, instead, attempting to collect the debt directly from 3D, which may or may not have assets sufficient to satisfy EWS’s judgment.

While, in the above cases, VP still may have been able to recover…

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Construction Due Diligence: Sooner is Always Better than Later

Walter D. Cupkovic and Jack L. Parrino | Thompson Coburn LLP | April 1, 2016

Non-payment of receivables is an ongoing problem for contractors, subcontractors and material suppliers notwithstanding the strength or weakness of the economy. Having knowledge of one’s alternative available legal remedies gives contractors, subcontractors, and material suppliers a distinct advantage.

When a contractor, subcontractor, or material supplier “sells” a job, it is selling three things — “labor, materials, and credit.” The sales department’s job is to sell the “labor and/or materials,” while the credit department’s job is to evaluate whether to extend credit on such sales. These conflicting goals could result in friction between the sales department and credit department. In fact, it has been said that the ultimate conflict in life is not between good and evil but rather between sales and credit. However, if the parties work together towards an acceptable solution balancing the sale with the extension of credit, ultimately the company will benefit. This is where the construction due diligence process and understanding the laws that benefit contractors, subcontractors, and material suppliers is valuable.

The first step in the due diligence process is the determination of the creditworthiness of the customer. This is performed by the credit department of a contractor, subcontractor, or material supplier. The review of the creditworthiness (or so-called “credit due diligence”) of a potential customer is not only good practice but essential in becoming a part of a successful and profitable construction project.

While credit due diligence is an important factor, there is no guarantee that a particular construction project will be successful or that otherwise having a “good customer” will result in payment in full. Let’s face it, contractors, subcontractors, and material suppliers sell to and/or work with many qualified contractors and owners but still find themselves in the middle of a troubled project, whether as a result of lack of additional financing to complete, a bankruptcy within the tier of contractors, or some other circumstance.

The importance of due diligence

What can a contractor, subcontractor or material supplier do to help protect themselves in such situations? An important option to consider is to perform “legal” due diligence up front at the same time that the credit decision is being made. In other words, in the event of non-payment by your customer, what rights and legal remedies may you have in the event of such non-payment above and beyond a breach of contract action against your customer? Such rights as to third-parties (other than your customer) are known as “third-party” rights. Such third-party rights may include mechanics’ lien rights against the subject property, lien rights against undisbursed constructions funds, and/or rights against a surety under a payment bond.

The availability of such rights varies by state and is based upon the type of project (i.e., public project or private project) and the nature of the owner (i.e., federal, state or local agency, or private entity). Also, the determination of where a contractor is within the tier of overall contractors (i.e., general contractor, subcontractor, sub-subcontractor, material supplier, etc.) is crucial in making such determination. As part of the analysis, it is essential to obtain as many facts related to the project as possible at its beginning (i.e., owner’s name, legal description, etc.).

Third-party rights

It is important to consider the availability of third-party rights sooner rather than later because depending on the circumstances, in order to preserve one’s rights, proactive prosecution of a claim in the form of a notice and/or filing may be required at the beginning, during, and/or within a limited period after the completion of the work or shipment of materials. If any deadlines are missed, the rights are waived.

Knowledge of the availability of third-party rights is extremely beneficial in making a credit determination about a customer and assessment of a project. To the extent third-party rights are available, a contractor and/or material supplier may still decide to perform work and/or sell to an otherwise questionable creditworthy customer. Other forms of protections to consider are personal and corporate guaranties, joint check agreements, and a requirement that questionable customers provide a surety bond for the company’s benefit.

Third-party rights are a valuable tool…

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Navigating Complex Preliminary Notice Requirements

Scott Wolfe | Zlien | February 26, 2016

Sending preliminary notice is the most important step in mechanics lien compliance. A majority of states require preliminary notice (sometimes called a pre-lien notice or notice to owner) from contractors, material suppliers, and other construction parties. Even if preliminary notice is not required, however, it is best practice to send this document on all projects for a variety of reasons.

Preliminary notice requirements and deadlines can creep up quickly. In some states, such as Georgia and South Dakota, preliminary notice is only required if the property owner or general contractor files and posts a Notice of Commencement. In most cases, the person filing notice of commencement must notify all sub-tier parties. Preliminary notice deadlines are measured from the filing of the notice of commencement rather than from the date the lien claimant began work on a project. To recap, notice of commencement can be a good thing as well as a challenge for lien claimants. It may pile on additional preliminary notice requirements, but it also clearly identifies the project start date and simplifies the process of determining deadlines.

The rules governing preliminary notice requirements vary so widely from one state to the next that keeping them straight is tough, especially for companies that work in more than one state. Most of the time, required preliminary notices are due within three months from the start of a project. The first two weeks of work can fly by, so it’s a good idea to prepare preliminary notice as soon as a contract is signed. Another benefit of starting this process early? Preliminary notices often require information about the project and other involved parties (such as the owner, lender, or GC) that can be tough to find, especially on large projects with multiple tiers of hiring. If you get a head start on submitting the document, you have some buffer time to locate the information you need.

And what happens if a deadline slips by? Is it still worth sending preliminary notice even if it’s late? The answer is, it depends. In states where sending preliminary notice is optional, there is, as you might expect, no late penalty, because there is no deadline. Other states offer limited protection to lien claimants that send preliminary notice late. For example, if California’s 20-Day Preliminary Notice is sent within 20 days of first furnishing labor or materials on a project, lien rights are fully protected. If the notice is sent late, it protects only the work done in the preceding 20 days. For example, if notice is sent on day 30, the claimant has no protection for work provided on days one through 10.

Other states’ lien statutes are less forgiving when it comes to missed deadlines. In a majority of states, sending preliminary notice late is fatal to lien rights. (Note: North Carolina and Virginia fall into this category.) It is essential to stay on top of notice requirements in these states in order to avoid unnecessary financial risk.

It’s clear that preliminary notice requirements are complex. Numerous considerations come into play when determining when to send preliminary notice. One must know when these documents are required, what information they should contain, when deadlines fall, and if those deadlines are strict or flexible. The best way to stay on top of these rules and requirements is to implement a strong credit policy with a preliminary notice program at its core. Several tools exist to assist with preliminary notice management, including software platforms that automate and simplify the process.

Navigating these provisions and requirements may seem intimidating or confusing, but keep in mind…

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